CFPB: Indirect Lenders Must Obey Equal Credit Opportunity Act

The Consumer Financial Protection Bureau on Thursday released a bulletin stressing that auto dealers who participate in indirect lending agreements must comply with the Equal Credit Opportunity Act when marking up interest rates.

“Consumers should not have to pay more for a car loan simply based on their race,” said CFPB Director Richard Cordray. “Today’s bulletin clarifies our authority to pursue auto lenders whose policies harm consumers through unlawful discrimination.”

In a release, the CFPB said research indicates indirect lending markup practices may lead to African Americans and Hispanics being charged higher markups than other, similarly situated, white consumers.

Indirect auto lenders often allow the dealer to charge the consumer a higher interest rate, an arrangement commonly known as “dealer markup.” The lender typically shares part of the revenue from that increased interest rate with the dealer.

As a result, the CFPB said, markups generate compensation for dealers while frequently giving them the discretion to charge consumers different rates regardless of consumer creditworthiness.

Lender policies that provide dealers with this type of discretion increase the risk of pricing disparities among consumers based on race, national origin, and potentially other prohibited bases potentially violating the ECOA, the bureau said.

The CFPB recommended that indirect auto lenders within its jurisdiction take steps to ensure that they are operating in compliance with fair lending laws as applied to dealer markup and compensation policies.

These steps may include, but are not limited to, imposing controls on dealer markup, or otherwise revising dealer markup policies; monitoring and addressing the effects of markup policies as part of a robust fair lending compliance program; and eliminating dealer discretion to markup buy rates, instead compensating dealers with flat fees.